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Sign of the Times

A recent High Court decision has highlighted the issue of bank mandates being signed by only one party in the context of a partnership. In Kotak v Kotak [2017] EWHC 1821 (Ch) (18 July 2017) the Court was required to determine whether the signature of one partner was sufficient where a bank mandate in respect of a loan agreement specifically required all the partners’ signatures.

The Brief facts

The partnership between two brothers carried on business in the textile industry. In 2000 owing to a downturn in business, the focus of the partnership shifted to property development.

A previous loan agreement with the partnership’s bank contained a printed statement to the effect that it 'MUST BE SIGNED BY ALL THE PARTNERS'.

It was alleged that one of the loan agreements was entered into by the partnership with the bank during the period in which one of the partners was in Spain and before his return in 2010. He alleged the agreements were only binding upon the partnership if signed by both partners and that none of them were signed by him, his signatures having been forged.

Evidence emerged that one of the partner’s signature had been applied to loan documents by members of the family with his alleged authority. However for the purpose of the proceedings the parties agreed that the Court should not resolve the question of forgery, or the question of any actual authority granted by the partner to sign loan agreements on his behalf using his purported signature and instead proceed on the assumption that the partner did not, sign the relevant loan agreements.

Thus one of the issues for the Court to determine was whether given both partners had not allegedly signed the agreements; the partnership was in fact bound and liable to the bank by the loan agreements.

The Partnership Issue

There was an important technical issue. Even if one of the partner’s signature’s had been forged the partnership may be liable to the bank and bound by the other partner’s signature on the agreements. The reason is that in law a partner has the authority to bind the other partners pursuant to section 5 of the Partnership Act 1890. That provides:

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

The Court’s Decision

The Court did consider a number of technical legal issues as to the mandate. However these are too lengthy to set out here.

In simple terms the Court noted:

The question was whether, notwithstanding that measure of protection a lender had by a partner binding the other partners (see section 5 Partnership Act 1890 above) it was the lender’s intention, that the loan agreements, should only bind if both partners signed the agreements.

In the ordinary way, an offer of lending to two persons, in their individual capacities, would require the assent of, or acceptance, by both persons, if both persons were to be bound. However, the context was a partnership.

The Court did not think that the lender’s intention was to provide for a mode of acceptance which, would remove the potential protection of the mandate, or of section 5 of the 1890 Act.

The signature provisions were set out as they were in the expectation that both parties would sign. Looked at objectively, and in context, the lender was not intending to preclude itself, as it would do, if it required the signature of each principal as a condition of its offer, from relying upon an acceptance of the offer in any other way that would bind the partnership, or in precluding itself, in the event of a forgery, from the protection afforded it either by the Partnership Act 1890 or by the mandate.

Thus the signing provisions were intended as an additional protection to the lender not an alternative one.

Conclusion

This was an unusual and technical case on the construction of a bank mandate. The dispute centered on two partners and the authority of one to bind the other. Crucially there was a tension between the wording of the mandate and the provisions of the Partnership Act 1890. However ultimately the Court decided that the lender did not intend to remove its reliance and indeed protection of the 1890 Act.

The age old adage be careful what you sign and more importantly take advice should never be underestimated.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.

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